Business Insider - Singapore

1

5 Brilliant Strategies That Make Honda One Of The Worlds
Most Innovative Companies
Jeffrey Rothfeder, Driving Honda Strategy
Jul. 30, 2014, 1:26 PM

The path to writing Driving Honda: Inside The Worlds Most Innovative Car
Company began with a question that perplexed me: If globalization was supposed to be
such a boon to multinationals, why are so many large manufacturers struggling to
make money outside of their home markets?
Few global manufacturers would admit it publicly, but in many private conversations
with executives I heard some version of this statement: Were selling more products
than ever in China and South America and other emerging markets, but our profit
margins there are minuscule to flat, when they even exist.
To address this puzzle, I sought to find companies that could serve as successful models
for multinationals operating in a globalized commercial environment; I hoped to
identify the characteristics that make an individual business more likely to generate high
profit margins, innovate, behave in socially responsible ways, and be strategically
creative wherever it establishes a foothold. Almost immediately, Honda Motor Co. fit
the bill.
To begin with, Honda has looked outward from its home shores well before
other manufacturers considered making or even selling products overseas. As long ago
as the 1950s, when Honda was only a few years old, the companys founder,
Soichiro Honda, bemoaned the limited growth opportunities in little Japan, declaring
that Honda Motor must maintain an international viewpoint and perceive the rest
of the world as its potential customer base and factory footprint.
Its no surprise, then, that Honda began selling motorcycles in the U.S. as early as
1959 and autos a few years later. Nor that Honda stunned the auto industry with its
1974 Civic, the first car to meet stringent U.S. Clean Air Act emissions standards
even as the large American automakers and Toyota were claiming it was impossible to
economically produce an engine that lived up to the acts goals. Or that Honda became
the first non-domestic automaker to successfully manufacture cars in the U.S. when it
opened its Anna plant in 1982.
Hondas aggressive early globalization strategy in the U.S. was followed by
similar successful forays in other parts of the world: It was the first Japanese
company to produce cars in China and its earnings record in India and Southeast Asia
and other far-flung regions is the envy of the auto industry.
In large part because of its approach to global operations, Honda, a relative industrial
newbie, has a lot to boast about: By a large margin, Honda is the preeminent engine
maker in the world with an output of more than 20 million internal combustion motors
annually; Honda has never posted a loss in its history, and its automobile operating
profit ratios of about 5% consistently top the industry; Hondas stock price has nearly
Business Insider - Singapore
2

doubled since September 2008, when the global economy collapsed; and Honda
vehicles are the most durable and long-lasting of any automaker, with 75% of its
cars and trucks sold in the last 25 years still on the road.
What then has made Honda excel so adeptly as a global multinational? The
secret strategic sauce that distinguishes Honda from other manufacturers can be
broken down into five ingredients:
1. Dont globalize, localize.
Unlike Toyota and most other multinationals in any industry, Honda is not a top-down
company, controlled by headquarters. Instead, Honda manufacturing subsidiaries
virtually everywhere around the world operate as autonomous companies, designing and
producing vehicles based on local conditions and consumer behavior.
In The Machine That Changed the World, the landmark book about automobile lean
manufacturing, the authors praised Hondas localization strategy for its conviction
about doing it all in one place in other words, combining engineering, design, and
manufacturing functions in each of its large local facilities. By contrast, virtually all
industrial companies keep R&D and other technical and design functions close to home,
where they can be managed by executives who are miles removed from local
preferences and circumstances.
2. Embrace paradox.
Honda is a questioning, knowledge-rich organization, which demands that its workers at
all levels continually poke holes in the status quo. They do that through daily, often
spontaneous meetings known as waigaya during which decisions, large and small, are
reevaluated and turned on their head in hopes of finding a better strategic or tactical
choice.
Throughout its relatively short history, Honda has welcomed paradox as a way to
promote critical thinking and reassess the so-called common wisdom, shaping new
responses to ingrained expectations. As one Honda executive put it: Waigaya to me
means perpetual dissatisfaction. At our company, self-satisfaction is the enemy. The
value of this system to a multinational organization is immeasurable.
Nothing is more important for global companies today than having the dexterity to be
simultaneously local and international, to swiftly respond to regional preferences while
scaling operating tactics and manufacturing improvements around the world. And as
Hondas success in the international arena demonstrates, this capability is directly
linked to unremittingly reexamining with every new automobile model
more broadly, with every new undertaking what is already believed to be true.
3. Robots? Not so fast.
Even as most major industrial corporations view robots and other forms of automation
as the best way to reduce costs and maintain productivity, Honda prefers a different
path. Hondas factories are purposefully the most labor intensive in the auto industry,
Business Insider - Singapore
3

employing robots only in areas that are dangerous or otherwise obviously less fit for
humans than machines.
Honda believes that assemblers become disengaged and their enthusiasm for their jobs
and, by extension, local innovation is muted by the presence of machines whose sole
purpose is to build cars cheaper and faster than humans.
As Honda sees it, that output and quality standards are too often set to the levels that the
technology can achieve and rather than the boundless creativity of human imagination.
Consequently, to enhance performance in a local facility, a new piece of equipment
would have to be purchased, instead of a new potentially revolutionary process
invented. Once you automate, youre incapable of further improvement, said Sean
McAlinden, chief economist at the Center for Automotive Research, paraphrasing
Hondas perspective.
4. Put an engineer in the hot seat.
Since Hondas founding in 1949 all of the companys CEOs (including the father of the
company, Soichiro Honda) have been engineers, veterans of Hondas prized
autonomous research and development unit. Thats an extraordinary record:
Conventional wisdom among multinationals holds that the most effective chief
executives are specialists in marketing, sales, or perhaps accounting anything but
engineering.
As a result, even CEOs in technologically based industries, like pharmaceuticals or
computer hardware and software, tend to know little about designing or
manufacturing the products that they sell or managing the global supply chain or
factory footprint. Thats often why CEOs favor centralization in which their most loyal
lieutenants near headquarters oversee distributed operations, acting as both a trusted
proxy and informant for the chief executive.
Reared in R&D, Honda CEOs strengths lie in product and process innovation,
primarily in designing new vehicle models and features and in conceiving
fresh techniques for building them faster and better. Consequently, their success as
managers is measured not by quarter-to-quarter results but instead by how well they
cultivate individual creativity throughout the organization and how well they disburse
Hondas unique corporate culture to its decentralized localization strategy to produce
continuous innovation.
5. Focus on factory flexibility.
Unlike other manufacturers, Honda can seamlessly produce multiple autos on a single
assembly line, one after another, and switch a line over to a newly designed vehicle
within hours. By contrast, it can take months for Hondas rivals to retool a factory for a
new vehicle.
One way Honda achieves this is through in-house engineering co-located at each major
production facility, serving as an independent operation that is focused solely on local
needs. Any problems that arise in the flexible factory can be addressed immediately by
this team which at most companies resides near headquarters and reports to corporate
Business Insider - Singapore
4

top executives ensuring that the steady stream of automobiles going through the line
is not impeded.
Such an efficient and nimble factory is the Holy Grail for all manufacturers and Honda
has earned high marks from auto analysts for its ability to deftly navigate this challenge.
In globalization terms, the advantage Honda gains is in being able to alter production
and capacity of individual models at a moments notice, depending on local sales trends
and the success of competitive brands.
Honda invented the flexible factory through an innovation known as synchronized
engineering: all of the vehicles coming into a factorys assembly zones share common
designs, such as similar locations and installation techniques for functions like brakes or
transmission. As a result, assemblers are agnostic about which car they are building
because in the factory only small variations differentiate, say, an Odyssey from an
Accord V6.
Jeffrey Rothfeder is an award-winning journalist and former editor-in-chief
at International Business Times. His latest book is Driving Honda: Inside The Worlds
Most Innovative Car Company.